Now that the Bank of Canada has gone ahead and implemented another super-sized rate hike in yesterday’s monetary policy announcement -- the second consecutive 0.5% increase as of April -- analysts are speculating there could be even larger ones to come, as inflation growth remains stubbornly high.
An economist from the Bank of America’s Securities arm has issued his take on what’s to come in the BoC’s upcoming July announcement, saying a 0.75% hike isn’t off the table.
“We believe the Bank of Canada clearly wants to move fast to the two to three per cent neutral range. So a 75 [basis point] hike in July is a very real possibility, in our view,” Carlos Capistran, Canada and Mexico economist at Bank of America Securities, wrote in an investor brief.
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However, he notes such an aggressive move would be largely contingent on last month’s inflation reading; Canada’s CPI came in at 6.8% in April, hitting a fresh 31-year record.
In the release accompanying yesterday’s rate hike, it acknowledged that inflation remains “well above” what was initially forecasted for April, and that it expects it “will likely move even higher in the near term before beginning to ease.”
“Almost 70% of CPI categories now show inflation above 3%,” states the announcement. “The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”
That’s lead to the BoC taking its most hawkish stance since before the pandemic, stating that its Governing Council “continues to judge that interest rates will need to rise further,” and that it is “prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”
That’s the language that has opened up speculation as to whether a three-quarter point hike could indeed be in the cards in future announcements, as the BoC races against time to pull its policy rate up to, or exceeding, its neutral range of 2.5 - 3%.
As Capistran put it, “This is a very strong statement from the Bank of Canada by historical standards.” Should a three-quarter hike occur, it would be the first in the central bank’s history; 0.5% is the highest one-time increase it has implemented in the past, and it has only done so five times, including yesterday.
According to the BoA analysis, however, July’s 0.75% hike would be the last of the BoC’s supersized moves, and that it would return to its typical quarter-point cadence in all remaining meetings, until the Overnight Lending Rate reaches 3.5%.
